Consider the IS-LM model in open economy discussed in the lectures, which builds on the equations Yd=C+I+G+NX (1) C=C+c-(YT) (2) I=fd (i+f_) (3) 6:6: (4) NX=Xa: Ez-Y (5) Y:iE (6) _ \"E m \"E _ _ _ A=Cc-T+Id-f+G+X (7) m=1c+z (8) 2=i (9) w E (1+z)(1+2 )Eil (10) The economy is initially in Scenario 0: the economy is following a xed exchange rate regime at E = E, which the market considers credible, i.e. Eil = 13'. Answer the following questions using a graphical illustration and a clear economic discussion of what happens in each scenario. a) 13) Consider Scenario 1, in which sudden negative economic news suggest that do- mestic economic growth is expected to deteriorate. This leads to an unexpected capital y out and a loss in the credibility of the exchange rate, which can be captured by a drop in Bil. Discuss what the domestic central bank should do to save the xed exchange rate regime and prevent the domestic currency from depreciating. Discuss what happens to each component of aggregate demand compared to Scenario 0; [20 marks] consider now Scenario 2, in which the sudden loss in the credibility of the exchange rate not only leads to a drop in E11 but also an increase in domestic spreads, captured by an increase in f. This occurs because domestic banks become more reluctant to lend in View of an expected exchange rate crisis. Discuss what the domestic central bank should do to save the xed exchange rate regime and prevent the domestic currency from depreciating. Clearly discuss how your answer differs from Scenario 1 from point a). Discuss what happens to each component of aggregate demand compared to Scenario 0; [25 marks] for both Scenario 1 and Scenario 2, discuss if a debt-nanced scal policy that changes scal spending can be used to prevent output from being affected by 2